Lukeprog over at Common Sense Atheism has made an excellent post on the problem of evil. It's a must read. As for free will, I do not believe we have free will in the same sense that theists do. Theists usually believe in libertarian free will, while I subscribe to Compatibilist Free Will, which is very eloquently described in Freedom Evolves as well as Sense & Goodness Without God.
The bottom line is that our actions are determined by our desires and our knowledge of how to fulfill those desires (as well as our intelligence to calculate from our knowledge the best way to fulfill a desire). Nothing else makes sense. I mean, if we have immaterial souls, how do our souls decide what we do? Does a soul choose to do something based on its priorities? If so, then that's the same thing as compatibilist free will, only instead of a soul, I believe our brain chooses based on what it desires most. If not, then what determines our choices? If nothing determines our choices, then by definition our actions are random and we cannot be held accountable for what we do.
What does this have to do with God? Well, a perfect, all knowing and all powerful God could create people who have completely good desires, thereby eliminating evil caused by the abuse of free will.
Before I finish this post I must address one further point: The charge that compatibilist free will would lead to moral anarchy. The argument is one which you may have already thought of: If we cannot control what desires we have, then how can we hold a criminal responsible. After all, given the same desires, knowledge, intelligence, and situation he would inevitably commit the crime he committed. This is true. But we still must hold him accountable because we want to provide a deterrant for other criminals contemplating doing the same act.